SHANGQIU, China -- This is not the equivalent of Silicon Valley. There isn't a lab in sight or a high-tech industrial park in the area. What attracts most of the attention is a two-floor factory building with a signboard that reads "Shangqiu Sanli New Energy Demonstration."

Still, this is a noteworthy place. It is healing one of China's long-standing headaches.

That headache is straw, basically an agricultural waste collected from nearby farms. Workers here chop it, compress it, then heat it slowly in sophisticated, oxygen-free ovens to produce biochar, a sort of charcoal that can be used as soil amendments. What remains -- two types of liquids called wood tar and wood vinegar -- are removed to sealed vessels and are sold as eco-friendly pesticides and soil conditioners.

Through this, the factory produces industrial goods worth nearly $10 million per year. The process also produces a combustible gas that it converts into electricity -- to run the machinery.

China has lots of straw. The nation is scrambling for ways to dispose of this agricultural waste, and companies like Shangqiu Sanli New Energy Ltd. are among a few that have succeeded. But figuring out how to scale this up remains a daunting challenge.

At the end of harvest season, China's breadbaskets, from the Yangtze River Delta on the coast to the landlocked Sichuan Basin, turn into a sea of baled straw. In some places it can extend to the horizon.

Chinese farmers used to store straw for cooking and heating. But with their rising incomes and growing desire for an easier life, more rural families began buying coal briquettes and bottled liquefied petroleum gas instead. So they simply set fire to straw.

Burning straw is a major cause of smog. The smoky air also has a pungent odor that causes coughing and other health problems. Sometimes it even costs lives as dense, eye-smarting smoke clouds drift over roads and lead to car crashes.

Lawmakers here have tried to ban straw burning, but farmers in a hurry to clean fields for the next planting often ignore that. In places like eastern China's Anhui province, the government sent drones aloft to identify the straw burners.

Tapping into folk wisdom
In 2005, after hearing about farmers in neighboring villages being jailed for burning straw, Lin Zhenheng, then a 48-year-old entrepreneur, decided to seek a solution.

Lin's company, Shangqiu Sanli New Energy, first consulted farmers who have mastered the use of straw for years. Then it brought in some experts. About a year later, the company came out with a pilot facility in the heart of Henan province, one of China's major crop-producing regions.

The facility turns straw into biochar and wood tar, cleaner-burning alternatives to diesel fuel. It also produces wood vinegar out of straw -- a liquid that makes nonarable soil grow crops. The facility captures a large quantity of combustible gas from the process to meet its own energy needs and to heat a nearby hotel and a public bathroom -- a popular facility in rural China.

The company later found that its biochar can improve soil quality and its biodegradable wood tar can kill pests in farmland while doing little harm to Earth.

The discoveries have whetted Lin's appetite for more straw business. His company now runs seven such facilities across the region and disposes of 200,000 tons of straw every year.

Helping with jobs and climate change
As the means of reusing straw have increased, so have employment opportunities. The company provides more than 400 factory jobs to rural communities and helps turn wasteland into farmland so that more villagers can work in their hometowns rather than migrating to cities.

Last year, the company persuaded dozens of rural communities to stop using coal by supplying them with equipment that processes straw into pellets to compete with coal. Some farmers found using biochar can keep the same crop yield while cutting fertilizer use by a quarter.

China uses more fertilizer than any other country, and that results in the release of nitrous oxide -- a greenhouse gas that climate scientists say is 298 times more powerful than carbon dioxide.

"China in recent years has begun trying to reduce greenhouse gas emissions from agriculture, but solutions it had used are either too costly or too time-consuming," said Pan Genxing, director of the Agriculture and Climate Change Center at Nanjing Agriculture University.

Pan estimates that biochar will help China cut carbon dioxide emissions for each ton of grain output by 25 to 45 percent.

But not everyone agrees. In 2009, a group of environmental organizations led by Britain-based Biofuelwatch issued a report against the use of biochar. The report argued that some studies showed it could increase carbon dioxide emissions from the soil.

What is beyond dispute is a decent economic return in Lin's business. It enjoys a double-digit profit margin each year. After the business presented its straw-to-energy-and-chemicals solution in a global forum last year, Lin said companies from Belgium, Russia and other countries have been in talks with him about exporting the technology.

China's biomass business potential has also caught the eyes of international giants. General Electric Co., for one, signed a partnership last year with an energy research institute in the city Guangzhou to develop and commercialize a technology that uses power from straw gasification to generate electricity.

According to China's latest bioenergy development guideline, the nation annually generates 340 million tons of straw that is available for energy use. So far, less than 3 percent of the straw has been used for that purpose.

Bumping up against King Coal
To seek more clean energy, the government here created fiscal incentives for companies nationwide to produce straw-based fuels and sell straw-generated electricity to utilities. It also subsidized the buildup of biomass power plants in rural China.

Still, there are problems. A straw gasification power plant built in Jiangsu province after an investment equivalent to $321,500 was abandoned only two months after it started in 2008. A local paper said the operator blamed the shutdown on safety concerns.

Lin has a different explanation: Collecting straw is labor-intensive. Transportation and storage also add to the cost. Some factories fail to convert straw into energy in an effective manner. And when they finally produce straw-based fuels, they come up against a more formidable barrier, which is that, despite the subsidies, coal is still cheaper to burn and easier to store and handle.

Policymakers here want to make cities use more biomass energy for heating. They promise to build biogas pipeline networks in rural communities. Lin said those policies help create market demand, but he wants more.

As a member of the Henan Provincial People's Congress, the region's legislature, Lin recently proposed to give the straw-to-energy industry more government support such as subsidized electricity and free tolls on trucks that transport straw. Those proposals are under review.

"If we can turn all of China's straw into energy, rural Chinese will no longer need other energy means," Lin said. "Henan province alone generates 70 million tons of straw each year, and that has an energy potential equal to seven big coal reserves. We'll run out of coal reserves one day, but we'll always have straw."